Bottoms Up: Is The Industry Coming Back?
By Connie O’Kane and Josh Vasquez

When you think about it, one of the most important things people do in any business or industry is find the bottom. Builders who want to erect skyscrapers need to know where the clay ends and the bedrock begins. Wall Street analysts, attempting to predict the end of a bear market, look for a “bottoming out” of stock prices. The bottom line isn’t called the bottom line for nothing. It’s where truth meets reality; where the rubber meets the road.

And so, after the first official recession in the promotional products industry in more than 20 years, we’re looking for the bottom too. And after sifting through the many statistics gathered from this year’s State of the Industry surveys, perhaps we’ve found it.

Financially, 2002 was nothing to write home about. Many distributors saw losses in both sales and profits last year. But there are signs that wobbly distributors have stabilized in recent months. Some who reported falling sales in 2001 say their sales held steady through 2002. Others increased their profit margins a bit. Order sizes are a little larger and order dollars are more than a bit more plentiful. 

“We had an increase – but a very small increase,” says Lorrayne Mancari, president of Goldner Associates Inc. (asi/209800). “I feel that on the whole we were lucky. We were doing something right. We were careful, not extravagant. We watched our expenses. We addressed the potential problems ahead and took precautions.”

For suppliers, the news was a little better in certain key areas. Many report that sales were up, and profits were up significantly. More about that later.

Getting Better All The Time?

There are indications that distributors turned the corner in 2002, however slightly. Nearly half (48%) said sales rose last year. Sales decreases were less extensive – 29% of distributors reported their sales were down, three percentage points lower than a year earlier.

The economy/recession was by far the biggest factor influencing distributor sales in 2002 – more than half of those who suffered sales declines cite it as the primary reason. “The economy is about 50% to 60% of it,” says Kim Musgrave, a partner in American Advertising (asi/119633). Musgrave’s firm has also been hurt by companies moving overseas and massive layoffs. 

More encouraging news emerged when looking at individual orders. The recent recession resulted not so much in fewer clients, but lower volume orders. This year’s data, however, reveals that median order size is up to $704 vs. $632 the year before and even a bit higher than pre-recession 2000, when it was $700. And distributors were selling more units per order last year (a median of 300 pieces as opposed to 275 in 2001).

Results were more mixed on the profits front, however. The number of distributors reporting higher profits slipped to 39% in 2002, down from 45% the year before. But again, there were indications that struggling distributors were stabilizing their businesses. The number of companies that lost profit dollars in 2002 had been trimmed almost 6 percentage points – to 20%. And even distributors who were losing money seemed to be losing less of it – the median loss in 2002 was 10% vs. 15% in 2001.

Managing Margins

If you’re going to use just one statistic to gauge the health of the industry, that statistic would probably be gross profit margin. And what do the numbers show? The industry’s median profit margin is 34% (for distributors), up one small-but-crucial percentage point from last year’s figure, and just one percentage point away from the 35% the pundits say you need to really make money in this industry.

Supplier Turnaround

As noted, the turnaround on the supplier side is more pronounced, though suppliers’ hard numbers still trail those of distributors. In 2002, 45% of supplier respondents saw increases in overall sales vs. 48% of distributors who said sales were up. Compare that 45% with only 38% last year, and you’d have to say that things are definitely looking up. Similarly, suppliers reporting sales decreases totaled 37%, down 3 percentage points.

Profits present an even rosier picture. In all, 46% of suppliers posted higher profits last year – up from a relatively dismal 31% in calendar year 2001. And only 28% reported declining profits, vs. 40% the year before.

Things get a little more convoluted when you look at the nuts and bolts numbers like orders and individual units. The median number of supplier orders dropped from 1,562 to 1,500 in this year’s survey. But the number of units per order increased considerably, from 250 to 320. “Many suppliers are enjoying increased sales if they continue to promote their products, offer new products, do sales meetings and ship orders accurately and on time,” says Jeff Meyer, CEO of Certified Marketing Consultants Ltd.

One very obvious silver lining in this year’s data is that distributors seem to be getting better about collecting what’s owed them. The average “days sales outstanding” (DSO) is 35 days, down from 37 days in last year’s survey. Again, smaller distributors seem to have a significant advantage here. Those at the lowest end of the sales spectrum collect in 32 days, on average, while the largest distributors say they need an average of 43 days to get paid.

Collections, of course, are crucial to doing business. And they can be the first casualty in tough times. Bad collections lead to cashflow problems, and cashflow problems are either solved with expensive bank loans or fester as bad credit. 

“I collect well through planning,” says Kristine Beaton, proprietor of Marketing Innovations (asi/261801). “[By that] I mean sitting down with my clients with a calendar for the year so they know well ahead of time when to pay. Some even pay early.”

It was obvious from this year’s data what collections can mean to the overall health of a business. As you might expect, distributors who collected in less than 30 days had higher-than-average profit margins, while those who collected in more than 30 days had lower-than-average gross profit margins.

It appears the industry has dodged some of the worst problems associated with bad debt and uncollected bills. “Companies that are starting to go down, they stop buying from us,” says Nadel. “We’ve had a lot of companies that were really big customers of ours that stopped working with us, and then a year or two later they went bankrupt. The good news is that they didn’t really owe us anything.”

SOI Data-Mining
Who Are The Best Clients?

We asked distributors to tell us about their most profitable clients. Roughly 25% say what sets them apart is that they’re “willing to pay a premium for creative services.” Sound familiar? This is what the industry has spent years trying to teach distributors – sell programs, not products. This allows you to differentiate yourself from those selling a commodity by emphasizing your expertise and creativity. 

The thing is, only 25% of distributors believe this to be their most profitable avenue. In second place on the “most profitable” customer list (18%) we find clients who “place the same order over and over again.” The third most popular response was clients who “know what they want and just need you to take the order.” 

Interestingly, the second and third place responses seem to reflect more of a “product peddler” mentality than a provider of solutions. And despite their popularity, keep in mind that even though clients who know what they want and place the same order over and over again may require less time and effort, they’re also a lot more susceptible to price-cutting competitors.

To see if there’s a correlation between the way distributors characterize their most profitable clients and the actual profitability of a company, we looked at the average gross profit margins of those who say their best customers pay a premium vs. those who say their best customers know what they want or place the same order over and over. 

The numbers match: The highest gross profit margins are associated with distributors who say their best customers are willing to pay a premium, while the other group shows slightly-below-average gross profit margins. Although this is certainly not conclusive evidence, it appears that there’s something to this argument.

– Dr. Marjorie Cooper

SOI Data-Mining
Big Growth Distributors

For our purposes, we define “big growth” companies as those distributors who had sales volume increases of more than 10% in 2002. In analyzing the resulting data, we found that these firms service an average of 243 client accounts, far fewer than the average of 352 for all distributors. They generate 74% of their revenue in promotional products, which is about the same as for all distributors (75%). Their average gross profit margin is 33.67%, again pretty much the same as the overall number (33.92%). Their selling expenses are 12% of total sales (compared to 11% for all distributors), and their general & administrative expenses are 17% (vs. 16.38%).

Other points of comparison: They say 15% of their sales volume involves in-house imprinting/personalization of blanks (vs. 22% for all distributors) and these firms outsource 40% of blanks to third parties for imprinting (compared with 38% for all distributors). They placed an average of $60,412 in orders through new suppliers last year vs. $58,571 for all distributors.

Who are they? They’ve been in the industry an average of 12 years, most are located in the East North Central, Pacific and Mountain regions. Three quarters of them are family-owned companies. They tend to offer art, design & layout services (81%), imprinting/personalization (70%) and company store/catalog programs (48%). In this sense, they’re consistent with all distributors. Their most profitable market? Manufacturing. For most distributors, it’s the education market, though education is second on the Big-Growth firms list.

After digging deeper, we find that these firms look very much like the average distributor in most areas. In a nutshell, they average far fewer clients, have slightly higher selling expenses, do less in-house production, are more likely to have posted a sales volume increase in 2002, more likely to have expanded their workforce and were slightly more likely to use imported products.

– Dr. Marjorie Cooper